“Put all of your savings on autopilot, and you won’t likely notice the missing cash.” – Jean Chatzky, CEO of HerMoney
If you’re a busy professional, you’re likely spending and saving money all over the place. Luckily, saving money consistently can be made extremely easy. If you’ve ever found yourself losing track of your spending and saving behavior, then automation could be for you. And even if you’re meticulous and keeping track of your cash flows, there are benefits to automating your savings that you could be missing out on.
Reasons to Automate Your Savings
The first argument for automating your savings is psychological. A lot of high earners get into the habit of becoming high spenders. The fact is that even if you earn a lot of money, if you spend it all you’re never going to become wealthy. When you automate your savings as soon as you get your paycheck, you’re paying yourself first. You’re taking the decision to spend away from yourself and learning to live below your means. You don’t need to take this principle to the extreme like Warren Buffett, but a little impulse control goes a long way.
Another benefit of automating your savings is that it gives you peace of mind and keeps you on track. When you automate, you won’t have to worry about if you’re saving enough to reach your financial goals. Just use one of the many savings calculators available online and see how much you’ll need to save monthly to reach your goal. If you have multiple goals, it might also be a good idea to open a separate savings account for each one. That way you can automate your savings and monitor your progress for each goal separately. This can take a bit of time up front, but it will be worth it in the long run.
Emperor clients will find this process exceptionally quick and easy. For each goal you set up, we’ll recommend a savings rate based on the frequency of deposits (weekly, monthly, etc.) that you select. This recommendation considers how long you’ll be saving for and the historical returns of your Emperor dividend portfolio. You can set up an unlimited number of goals and automate your savings for each one right on our online platform. But we digress.
The most crucial reason to automate your savings is so you don’t miss a deposit. To showcase how detrimental it could be to your savings to miss even a few deposits, let’s look at an example.
Missing Just One Month Each Year
Hector and Iris are both busy young professionals starting to invest in stocks today so they can retire in 30 years. Let’s assume they’re both earning a 10% return on their investments every year compounded monthly and want to save $2,000 each month. In all regards, both of their investment advisors are the same, but there’s one catch. Hector’s advisor doesn’t support automatic deposits and Iris’ does. Due to this, Hector misses a deposit every year because he splurges during the holiday season. We’ve all been there, but let’s see what the consequences are.
After 30 long years of saving money, Hector has accumulated just under $3.5 million dollars. Surely nobody can complain about retiring on that amount, but how did Iris do?
After 30 years of automatically saving money, Iris has accumulated slightly over $4.5 million! Although Hector only missed 30 deposits, saving $60,000 less, Iris was still able to earn over $1,000,000 more than him. You might be wondering how that’s possible. It’s simple, compound interest.
Compound interest is when your interest earns interest. So rather than earning interest on $4,000 in month three, Hector and Iris are earning interest on $4,016.67. This might seem small, but as you saw in our example, compound interest has a snowball effect over a long period of time1.
Although automating your savings is quite simple, you can see just how beneficial it could be for your savings. This is especially true if you lead an exceptionally busy life and find yourself losing track of your finances. If that sounds like you, then you should probably consider financial automation because it’s more than just automated savings. For example, most financial institutions will let you automate your bills and even your credit card payments. And with Emperor, you could automate your investments too.
1This is a hypothetical example that is demonstrating a mathematical principle. It does not illustrate any investment products and does not show past or future performance of any specific investment.